Had a word with one of my friends who's a Robert E Howard scholar. Here's his reply:

The story is called "The Blue Flame of Vengeance" and it appears in an August Derleth compiled anthology called OVER THE EDGE which was published to celebrate 25 years of Arkham House. It is a tale of Solomon Kane but its accreditation to Howard is a dubious piece of publishing practice on Derleth's part. The original Howard story is called "Blades of the Brotherhood" and contains no supernatural element whatsoever. This version was very heavily rewritten by John Pocsik and the whole merman element is Pocsik's invention.

"In a less scientific age, he would have been a devil-worshipper, a partaker in the abominations of the Black Mass; or would have given himself to the study and practice of sorcery. His was a religious soul that had failed to find good in the scheme of things; and lacking it, was impelled to make of evil itself an object of secret reverence."